PricewaterhouseCoopers (PwC) is facing an £840m legal action from Cattles, the
sub-prime lender and former client, backed by the Royal Bank of Scotland.

The action comes only days after the accountant said it regretted it hadn't met "normal high standards" in its audit of investment bank JP Morgan's securities division.

Cattles, which saw its shares suspended in 2009, claims PwC is responsible for years of gross accounting misstatements. The company alleges that between 2005 to 2007 PwC was to blame for "a gross misstatement at the heart of the accounts" that ultimately led to numerous profit warnings and left the company close to insolvency.

According to court documents, Cattles claims the action against PwC could result in "substantial damages". In a preliminary legal hearing at the High Courts of Justice in October, Judge Henry Bernard Eder awarded Cattles the right to demand PwC produce secret documents relating to past audits of the company. The pre-disclosure hearing, which cost more than £250,000 in fees for barely a four-hour hearing, also gave PwC the right to gain access to the case material currently being assembled by Cattles and its lawyers, Ashurst.

It is thought Cattles will file for a formal hearing in 2012. According to an outline of the case by Judge Henry Bernard Eder, Cattles alleges PwC incorrectly classified loans that were in long-term arrears "which should have been treated as impaired". When the problem was discovered, Cattles said it was forced to report a loss in 2008 of £745m. It also restated earnings from the previous year to a loss of £98.5m, from a profit of £165.3m.

The case is already under investigation by the Accounting & Actuarial Disciplinary Board and comes at a time when the entire audit industry is facing a regulatory shake-up.

A spokesman for PwC said: "We are not aware of a claim against us. In respect of the discovery order, it is a preliminary process for information sharing between both sides. As previously stated, we will continue to vigorously defend our work."

In 2008, when Cattles was forced into making such large writedowns, the company's book value fell bellow its outstanding debts, leaving RBS and a banking syndicate as owners in a debt for equity swap.